What Is a Medical Loss Ratio and Why Does it Matter?

Every year, American consumers and employers spend billions of dollars to purchase health insurance to help them gain access to the health care that they need and the cost of coverage has doubled over the last 10 years.

Under the Affordable Care Act, consumers can soon rest assured that the bulk of their premium dollars are going primarily to pay for care, not for overhead, marketing, advertising, and big salaries and bonuses.

How will this happen?  Through an important provision of the law requiring insurance companies to meet new requirements concerning their “medical loss ratios.” 

Like many health insurance terms, “medical loss ratios” sounds confusing, but all it refers to is the percentage of your premium dollars that an insurance company spends on providing you with health care and improving the quality of your care, versus how much is spent on administrative and overhead costs and, in many cases, high salaries or bonuses.

To be sure your premium dollars are spent primarily on health care itself, the law requires that 80-to-85% of the money collected by insurance companies be spent on health care services and health care quality improvement. 

In other words, for many of you, this part of the law---the medical loss ratio limits---will mean that more of your money that you pay out each month for premiums will be going to your actual health care, and to improving the quality of that health care.

To give insurance companies time to adjust, these requirements will kick in next year.  And if insurance companies do not meet these goals because their administrative costs or profits are too high, they must provide rebates to you, the consumers.

This is part of the larger goals of the Affordable Care Act: making insurance more affordable and more transparent; holding insurance companies accountable, and increasing the quality of your care.

Today, the National Association of Insurance Commissioners (NAIC), with representatives from every state and the District of Columbia, approved a set of recommendations on how to calculate an insurance company’s medical loss ratio.  This was the product of months of hard work, public hearings, and consultation with consumers, employers, insurers, and others. The NAIC has a long history of helping develop these types of rules through a transparent process so everyone is at the table.

The NAIC recommendations work to ensure that consumers get better value for their health care dollar, while recognizing that this is a big step for the insurance industry.  Now, the Department of Health and Human Services (HHS) will use the NAIC recommendations as a basis for writing the official rules.

Stay tuned as HHS moves forward with this new policy to help ensure not only cost savings but higher quality care for consumers.